How to Handle Retainage in Construction Billing

Retainage is a portion of each construction payment held back by the owner or GC. It is often 5 to 10 percent of each pay app. The money is released at substantial completion. You get a clear path to final payment once punch list items and closeout docs are delivered.

What is retainage and why is it used?

Retainage keeps a small percent of each progress payment in reserve. This makes sure the work gets finished to spec. Clear retainage terms in the contract cut disputes and help both sides plan cash flow.

• Typically 5 to 10 percent withheld from each progress payment
• Released at substantial or final completion per contract
• Applies to prime and subcontracts; check pass-through clauses
• Goals are quality, timely completion, and clean closeout

Here is a simplified example of how retainage adds up on a $100,000 contract with 10 percent retainage, billed in four equal progress payments:

What are common retainage rates and rules?

Retainage terms live in the contract. Know the percentage, the milestones for partial release, and any special rules. Watch for rules on stored materials or change orders. Note that some states cap retainage by law.

• A standard rate, like 10 percent, may step down after a completion threshold
• Partial releases may occur at milestones, like MEP rough-in complete
• Stored materials may carry retainage at the same or adjusted rate
• Change orders should mirror base retainage terms unless stated

How does retainage appear on AIA and progress billing?

On AIA pay apps, retainage shows on the G702 summary. It also shows within the G703 line items tied to your schedule of values. Accurate math prevents delays. See how the G702 and G703 forms handle it.

• Show retainage percent and dollar value on the G702 Application for Payment
• Apply retainage per SOV line on the G703 Continuation Sheet
• Adjust retained amounts when change orders add scope or value
• Carry balances forward cleanly month to month to avoid disputes

Retainage Tracker

Held from every draw · 10% contract rate

Demo Builders

Shops at Parmer Lane

	Billing period	Work billed	Retainage held (10%)
1	Application 1	$22,000	$2,200
2	Application 2	$34,500	$3,450
3	Application 3	$28,700	$2,870

Held to date · released at closeout $8,520

When should you expect retainage on a job?

Expect retainage on most commercial and public jobs. Many include it by default. On private work, the terms are often negotiable. State law can also limit the rate or release timing.

• Public and commercial contracts: retainage is common
• Private jobs: rate and rules are often negotiable
• Subcontracts: confirm pass-through terms with the GC
• Stored materials: confirm whether retainage applies

Plan ahead for the cash gap. Held-back funds add up fast on a big job. See retainage and cash flow for ways to plan.

How does retainage release and closeout work?

Retainage is usually released at substantial completion. Any remainder is held until final completion. Good documentation and timely punch list work speed up the release.

• Deliver closeout docs: warranties, O&M manuals, as-builts
• Complete punch list items and get sign-offs
• Verify lien waivers and vendor or sub balances
• Request partial or final release per contract language

What are the common retainage mistakes?

Most retainage disputes start with inconsistent math or unclear documentation. Standardize your process across every project.

• Applying different percentages across SOV lines
• Not updating retainage after change orders
• Forgetting stored-materials retainage rules
• Missing paperwork at closeout that delays release

How does software simplify retainage?

Contractor software like Werx automates retainage on progress and AIA billing. It keeps SOV math consistent and syncs to accounting for clean records.

• Set retainage rules once, then apply them to all SOV lines
• Auto-calculate retainage on progress, stored materials, and changes
• Generate AIA-style G702/G703 with accurate retainage shown
• Sync with QuickBooks Online to keep books aligned

Learn more: AIA billing and progress billing.

Key takeaways

• Retainage holds back 5 to 10 percent to ensure quality and completion
• Spell out rates, milestones, and release terms in the contract
• Show retainage clearly on AIA and progress billings using G702/G703
• Werx automates retainage across SOV lines, change orders, and stored materials